A novated lease is a popular vehicle financing option that involves a three-way agreement between an employee, an employer, and a finance company. This type of lease is unique because it includes an arrangement where an employer takes on the responsibility of lease payments from the employee’s pre-tax income. This article will explain what a novated lease is, how it works, and its benefits and considerations.

 What is a Novated Lease?

A novated lease is a car lease that has been “novated”, meaning that the obligation to meet the lease payments is transferred from the employee to the employer. It’s a form of salary packaging or salary sacrifice arrangement.

How Does a Novated Lease Work?
  1. Lease Agreement: The employee enters into a lease agreement with a finance company to lease a car.
  2. Novation Agreement: The employer and the finance company enter into a novation agreement, where the employer agrees to take on the employee’s lease obligations.
  3. Salary Packaging: The employer then makes lease payments on behalf of the employee, using the employee’s pre-tax income. This reduces the employee’s taxable income.
  4. End of Employment: If the employment ends, the responsibility for the lease reverts back to the employee, who must continue the payments or make other arrangements.
Benefits of a Novated Lease
  1. Tax Efficiency: Since lease payments are made from pre-tax income, it can reduce the employee’s taxable income and potentially lower their tax liability.
  2. Convenience: All costs associated with the car, including lease payments, fuel, maintenance, and insurance, can be bundled into one regular payment.
  3. No Upfront Capital Required: Employees can acquire a new or used car without the need for a significant upfront payment.
  4. Flexibility: Employees have a range of choices regarding the type and model of car they lease.
  5. GST Benefits: Employees may benefit from GST savings as the employer can claim GST credits, potentially reducing the lease and running costs.
  1. Fringe Benefits Tax (FBT): The value of the car and its running costs can attract Fringe Benefits Tax, which the employer must pay. However, this can often be offset by employee contributions.
  2. Financial Commitment: Employees need to consider their long-term financial commitment, as the lease is typically for a period of 2-5 years.
  3. Employment Stability: If employment is terminated, the lease obligation reverts to the employee.
  4. Insurance and Maintenance Costs: These costs are typically included in the lease but can vary based on the car and usage.
  5. Residual Value Risk: At the end of the lease term, the employee may have to pay a residual value on the car or refinance the lease.

A novated lease can be a financially advantageous way for Australian employees to own a car, with potential tax benefits and convenience. However, it’s important for both employees and employers to understand the implications, including FBT, and ensure the arrangement aligns with their financial circumstances and needs. As with any financial decision, contact us to assess individual situations and make informed decisions.